Additional information provided through visualization

Although the third hypothesis of the thesis is rejected, the author claims that the simulated Ohlson (1995) model provides investors with valuable additional information. One of the most prominent advantages of the simulation is the visualization of all the possible outcomes as probability distributions. As stated in the literature view of the thesis, this helps an investor to detect the possible inherent biases and reassess his or her estimates.

22 _𝑆𝐸

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Probability distribution of all the possible outcomes concerning the expected stock price for the FY2008 is visualized in Figure 11 as follows:

The red line on the left

denotes the actual

closing stock price at the

publishing date of

financial statements of 2008. The blue line is the expected stock price or the mean generated by the simulation model and the green line is the median value. As the

blue line can be also regarded – on the grounds of the simulated Ohlson (1995) model – as the target price of the stock, one could have drawn a conclusion at that time to buy the stock as it was significantly undervalued by the equity market. Worth emphasizing, this requires a strong faith in the model and its fundamentals as the model is statistically speaking very biased.

In order to elaborate the

practicality of the

simulated Ohlson (1995)

model and the

additional value it

provides, the illustration on the left in Figure 12 of the closing price on 23 January 2009 for the FY2008 with respect to the simulation model should provide investors with additional information on the stock price. As the purpose of this thesis is to assess the general applicability of the simulated Ohlson (1995) model by benchmarking the observed

Figure 11 Probability distribution of the expected stock price generated by the simulated Ohlson (1995) model – FY2008

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market prices of KONE Corporation’s class B share against the prices generated by the simulation model, the model does not – at least based on the FY2008 – result in accurate values. Statistically speaking, the estimator or the expected stock price is very biased and thus cannot be considered accurate. Therefore, from that perspective, the simulation model did not work well as for the FY2008. However, if an investor placed trust in the model and the assumptions behind it, there would have been a strong incentive to buy the stock as it was highly undervalued by the equity market. In order to imitate the famous Warren Buffet’s quote stated at the beginning of the thesis, the price set by the equity markets is substantially lower than the fundamental or true value of the stock. Additionally, the stock price went up and a year later was valued at €14.28. As shown below, the spread starts to narrow significantly after the clear impact of the Financial Crisis.

The same analysis was

conducted for the

FY2009. In comparison with the prior year’s outcome, the FY2009 (illustrated on the right in Figure 13) results in similar interpretations: the expected stock price

generated by the

simulated Ohlson (1995) set higher than the actual closing price, the

distribution of all the possible outcomes is similar and the same initial recommendations can be made (a strong recommendation to buy). Although the model did not generate an accurate stock price in comparison with the actual stock price, one should take into account that if an investor followed the interpretations and recommendations made in 2008, the investor would have gained substantially from the transaction. The same recommendation to buy the stock would have resulted in substantial profits also in 2009.

As the assumptions behind the simulated Ohlson (1995) model are based on raw historical accounting numbers extracted from the audited financial statements of KONE Corporation,

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the results presented above are in a way neutral and free from investor-specific biases. The historical discount rates and perpetual growth rates are also based on raw market data and not for example on the author’s personal perceptions.

Interim reports, recent news about a positive company performance in China or the world- wide chaos caused by the Financial Crisis are not incorporated into the model. This brings us to the obvious advantages and disadvantages of the model. The simulated Ohlson (1995) model is an excellent valuation tool for those who are fully confident about the future company performance regardless of what may happen around the firm. The value relevance of the model’s variables seem to ensure that the model is built upon a solid premise. This, however, is at the same time a clear disadvantage of the model. Taking the model on trust is not recommended because it would have required for example ignoring the Financial Crisis. Next the thesis discusses the results of the conducted scenario and sensitivity analyses which ought to provide some answers to how the expected stock price generated by the simulated Ohlson (1995) model reacts to the different scenarios of uncertainty and changes in the four variables.